22 juli 2011
Cyclical leverage for blue chip growth

Generally weaker advanced indicators have triggered rethinking on the economic scenarios in vogue only a few months ago. After two years of recovery, leading indicators have sagged mostly in the US but China and Europe have also been affected, quite sharply in China and less radically in Europe. Commodity prices have fallen heavily as a result, adding to worries that China’s hard landing would jeopardise the cycle.  

Are there serious grounds for assuming the economy is heading south? Some economists view the current recovery as a simple illusion created by government economic stimulus plans that is likely to vanish once the aid dries up. Others see no cyclical downturn but fear that the pullback seen in the middle of 2010 could return. The end of QE2 in the US, worrying inflation in Europe and emerging countries, and the monetary remedies that result from this, are just some of the current preoccupations.

But no economic cycle in the past has ever progressed smoothly and the exceptional nature of the last recession means that this cycle will be no different. Previous episodes, for example in 1994-95 and 2004, saw leading indicators fall back temporarily without any impact on the length of the cycle itself. Two and a half years after the financial crisis peaked, the current fall back must be analysed from every standpoint.